How a fake tweet sent the Dow plunging

Manoj Narang, founder and CEO of financial technology company Tradeworx, speaks with Anthony Mason about the impact false news can have on the stock market.

(CBS News) The calm returned to Wall Street after Tuesday's Twitter jitter. A hacker put out a phony tweet, and the Dow lost $200 billion in stock value.

The FBI and the SEC are investigating the hack that sent the markets tumbling. Stocks were rallying when a bogus post went out over Twitter at 1:07pm to the Associated Press' nearly 2 million followers:

"@AP: Two Explosions in the White House and Barack Obama is injured," it read. In the next 3 minutes, the DOW tumbled 147 points. A single tweet had unnerved the market.

Manoj Narang, who runs a New Jersey-based electronic trading firm called Tradeworks, said false information on Twitter could end up causing an economic domino.

"And that's always been the case," he said. "That false news can cause a market impact."

Tradeworks uses mathematical equations to decide to when to buy and sell stocks. Narang calculates it took 22 seconds after the tweet for the market to start to fall.

"This was good old-fashioned human trading," he said.

But computer trading programs, reacting to the movement, then kicked in, driving stocks down even further. Electronic trading can even be programmed to respond to news over the internet. But Narang says it's high risk.

"As a computer scientist, yeah, you can do a keyword search that identifies 'bombing' and 'White House.' But how do you know if a bombing actually occurred in the White House?" he said. "So it's very difficult to trade on that. The amount of false positives would probably be 99 to one, if not worse."

AP quickly disavowed the tweet, and the markets immediately recovered. Syrian hackers claimed responsibility for the hoax. If caught, they could be charged under the computer fraud and abuse act.